Monday 27, November 2017 by Jessica Combes

Turkey sovereign ratings affirmed


Capital Intelligence Ratings (CI Ratings or CI), the international credit rating agency, has affirmed Turkey’s Long-Term Foreign Currency and Local Currency Sovereign Ratings of ‘BB+’ and its Short-Term Foreign and Local Currency Sovereign Ratings of ‘B’.

The outlook for the ratings was affirmed at ‘Negative’, reflecting several factors: persistently high external financing needs and continued reliance on external capital inflows that are sensitive to changes in investor sentiment; CI Ratings’ expectation of weaker institutional strength following the move to an executive presidency and the likely impact on investor confidence and the pace of reform implementation; continued reliance on fiscal policy to stimulate the economy and trigger higher domestic consumption; and high geopolitical risk, which poses a threat to the security situation in Turkey, in addition to ongoing tensions with some key EU member states, which could adversely affect foreign capital inflows.

The Turkish economy rebounded in the first half of 2017 underpinned by expansionary fiscal policy, growing by five per cent year-on-year according to the latest official figures based on revised national accounts. Real output growth is expected to average 5.5 per cent in 2018 to 2020 according to official forecasts. However, risks to economic growth prospects remain pronounced as above-target inflation, high–albeit declining–unemployment, continued depreciation of the lira and unfavourable geopolitical conditions continue to weigh on private consumption, while relatively unfavourable global economic conditions hinder a speedier recovery in net trade. Indeed, the IMF foresees lower average growth of 3.5 per cent over the same period.

Fiscal performance has weakened somewhat and CI expects the central government budget deficit to increase to 3.2 per cent of GDP this year, compared to a revised 1.3 per cent in 2016 and higher than the targeted deficit of two per cent. The budget deficit is expected to average 2.4 per cent of GDP in 2018-2019. CI also expects that general government debt will remain manageable at around 28 per cent of GDP in the period 2017-2019, while the government aims to bring down the debt to 25 per cent of GDP in 2019. However, risks to the outlook remain considerable as expansionary fiscal policy, which is not expected to be phased out before 2020, could erode the government’s fiscal space and contribute to increasing debt levels.

Turkey's persistent current account deficit and high external financing needs continue to give rise to significant external refinancing risks and render the economy vulnerable to external shocks. Intensifying domestic and external pressures, as well as renewed currency volatility, have led to progressive declines in gross official reserve assets which stood at $104.9 billion in September 2017, compared to $106.1 billion at end 2016 and a peak of $131 billion in 2013. Reserve coverage of the country’s gross financing needs remains below prudential levels, with CI estimating that $165 billion (nearly 156 per cent of the gross official reserves) of Turkey’s external debt will mature in the short to medium term. Against this background, any deterioration in Turkey’s credit profile could limit the availability of affordable external financing and lead to higher sovereign risk.

Political and geopolitical uncertainties remain significant and are adversely affecting investor risk perceptions. Policy predictability and institutional strength are expected to remain constrained by the government’s intention to finalise the shift to an executive presidency prior to the upcoming elections in 2019, in addition to the ongoing state of emergency. There is some concern that the future increase in the power of the president will adversely affect the functioning of some key institutions and lead to the delay or postponement of the implementation of key economic, labour market and legislative reforms.

Notwithstanding the above, Turkey’s ratings continue to be underpinned by a number of factors, including the size and diversity of the economy. The ratings also reflect the relatively favourable government debt metrics.

The outlook for the ratings is ‘Negative’. This means that Turkey’s sovereign ratings are likely to be downgraded over the next 12 months. The ‘Negative’ outlook reflects CI’s perception that high political and geopolitical risk factors, in tandem with continued exchange rate volatility and high external financing needs, would increase external refinancing risks and render the economy vulnerable to external shocks.

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